Ohio needs unimpeded energy markets
The truth is that the best way to secure a reliable electric system for Ohio would be to shift to competitive markets, which use the lowest-cost forms of energy and shift risk to the private sector.
Coal used to provide the backbone of this system, but changing economic forces have altered its competitive position.
Some members of the coal industry claim coal retirements would cause “disastrous consequences” for the power grid. Unfortunately, some conservatives — both in Washington and here in Ohio — have found those bogus arguments convincing. It’s time to set the record straight.
Under Secretary Rick Perry, the U.S. Energy Department recently completed its report on electric reliability, including concerns about coal retirements.
The report concluded that market forces are the driving force behind coal retirements. Neither the growing market share enjoyed by renewable energy sources, nor the retirement of so-called “baseload” power plants, have created problems for reliability, according to the DOE report.
In fact, according to the North American Electric Reliability Corp., most measures of electric reliability are either holding steady or improving. This evidence, thankfully, led President Donald Trump to reject the coal industry’s proposal to put a moratorium on coal plant retirements. Gov. John Kasich also has declined to give struggling coal plant owners a free pass around competition. This sentiment should rub off on other Ohio policymakers.
No single fuel source is essential to operate a reliable grid. Reliable electricity markets draw from a portfolio of resources, which come in many shapes and sizes and have differing effects on fuel diversity. In fact, fuel diversity in the PJM Interconnection, which administers Ohio’s market and operates its electric grid, actually increased in recent years, as its portfolio previously was disproportionately reliant on coal. On the other hand, some reliable systems use little to no coal. This fact alone doesn’t tell you anything meaningful.
In its study, the DOE highlighted a recent paper by the R Street Institute that made the case that greater fuel diversity doesn’t necessarily either make the electric system more reliable or reduce economic risk. For its part, PJM notes that blending the most and least diverse portfolios of energy resources tends to provide the most reliable electricity generation. Rather than get hung up on fuel diversity, policymakers should focus on ensuring the private sector has the proper incentives to manage risk and perform reliably, which only comes from well-functioning markets.
PJM’s electricity markets set definitions for reliability and offer incentives to procure reliable products through competitive markets. They work well, especially for deregulated or “restructured” states like Ohio, but are nonetheless imperfect. The DOE’s report suggests some refinements to these markets, but making those changes will not swing the competitive landscape to favor unprofitable coal plants.
Competitive forces keep prices low for consumers, regardless of fuel choice. Markets swiftly adjust to shifts in economic fundamentals.
None loom larger than dramatic reductions this past decade in the cost to produce power from natural gas. Merchants in competitive markets followed this economic shift by retiring unprofitable legacy plants and building highly efficient natural gas plants where they could obtain the cheapest fuel on the pipeline system. Meanwhile, monopoly utilities have clung to many unprofitable coal plants to maximize their returns under rules that guarantee them the ability to recover the cost of service. Such differences have contributed to electric rates increasing in monopoly states and decreasing in market states.
Markets can only achieve success if politicians stay disciplined. Bailing out unprofitable coal plants will undermine Ohioans’ power choices, raise their costs and harm the very investment climate needed to make a reliable grid possible. In fact, the independent monitor for PJM sees coal retirements as a natural market evolution and stresses that subsidies threaten the viability of competitive markets.
Economic conditions should determine the fuel mix, not regulators and politicians. Ohio policymakers would serve their constituents well by fixating their efforts on empowering markets, such as the plan by state Rep. Mark Romanchuk, R-Ontario, to finish the deregulation of Ohio’s electricity system.
Ohio conservatives face a test: Either stand by the power of markets to provide consumers what they want and need, or cave to the false claims of a beleaguered industry that happens to be facing superior competition.